China’s Wen Promises RMB Stability to Trade Companies

Oct. 19 – During his recent tour to China’s southern province of Guangdong, Chinese Premier Wen Jiabao vowed to offer more support – including a “basically stable RMB exchange rate” – to exporters that have been suffering from the tightening lending environment, local currency appreciation and declining external demand.

Making his remarks at a trade forum attended by local companies that rely heavily on exports, Wen emphasized that it is essential to rebuild the confidence of enterprises by offering them a prospect of stable policies. In order to achieve that goal, the government will continue providing tax rebates for exporters, offer increasing credit support, as well as better financial services to enterprises engaged in foreign trade and maintain the “basic stability” of the RMB exchange rate, Wen said.

Balanced trade – instead of large trade surplus – is what China is pursuing now. However, balance should not be reached by reducing exports, but instead should be reached by increasing imports, according to Wen. China will provide distinct types of favorable policies such as import discount interest, import credit and import tariffs to trade companies, in a bid to expand the scale of imports.

The premier also highlighted the implementation of China’s “Going Out” Strategy, saying the government will largely encourage Chinese companies to establish their processing bases, marketing network, as well as research and development centers overseas. On the other hand, Wen says China will keep its door open to foreign direct investment (FDI), and incentives will be given to FDI projects that flow to the country’s middle and western areas and engage in the fields of high-end manufacturing, high-tech, modern services, new energy and green industries.

Chinese exporters are sadly seeing their profits shrink due to a variety of reasons. Both labor and factor costs are rising significantly while small enterprises are seeing less financing avenues in a tightening monetary environment. Global demand has been sluggish as a result of the lingering financial crisis in the West and the 30 percent to 35 percent increase in the value of the RMB over the past four to five years has also been hurting local exporters’ interests.

In September, China’s trade surplus fell for the second straight month, declining by 12.4 percent from a year earlier to US$14.5 billion, according to China’s General Administration of Customs. Growth in shipments to Europe, China’s largest export market, plummeted to 9.8 percent from 22 percent a year earlier, amid the debt crisis in the Euro area.

At the forum, Wen also warned enterprises that “the Global Financial Crisis has not come to an end yet,” revealing concern over the potential challenge the deteriorating external economic environment may bring.

In contrast to China’s efforts to back its exporters and stabilize the RMB exchange rate, the U.S. Senate last Tuesday approved legislation that aims to pressure China to let the RMB rise in value at a quicker pace. The Senate is not happy with the undervalued RMB, which is believed to have led to the large U.S. trade deficit and the country’s high unemployment rate.

“China has been gaming the trading system to hold down the value of its currency to give its companies a leg up. Its currency has appreciated, but not enough,” Secretary of State Hillary Clinton said in a speech.

Chinese media reacted strongly to the bill currently passed in the Senate, arguing Beijing has already committed to gradual currency reform and the value of the RMB is just a “scapegoat” the Senate found for the persistent state of economic gloom in the United States.

Maurice “Hank” Greenberg, former executive officer of American International Group Inc., raised concerns that the bill may bring about risks of igniting a trade war.

“That way of thinking protectionist – it leads to trade wars – it’s simply wrong,” said Greenberg, adding that he believes the move is “not in our national interest” and “a dumb idea.”

However, seeing the continuous shrinkage in China’s trade surplus recently, the U.S. policymakers may be weighing their steps to avoid the escalation of the dispute. The U.S. Treasury Department said it would delay the submission of a semiannual report to Congress – which would contain a ruling on whether China is manipulating its currency – until after the G20 meeting and the Asia Pacific Economic Cooperation forum scheduled this month and next.